This is kind of a follow up to yesterdayâ€™s post about how some people see $100,000 as the magic number to enable them to sustain a comfortable lifestyle. Just to make sure we are on the same page, the previous post isnâ€™t about â€œretiringâ€ where you donâ€™t have to do anything anymore, such as having a few million dollars. Another way to look at it is how much do you need in terms of an income pool to place yourself in a very good position where you can simply create streams of income to sustain a lifestyle while not having to â€œworkâ€ in a conventional way? I guess you can call it passive income if you want.
With that in mind, these numbers are completely made up just to get the general point across on how some people approach it. For example, letâ€™s say with the $100,000 figure, for the whole year our expenses for an individual is $30,000. Now letâ€™s say the person is into real estate and purchases this nice small office space for say $50,000 and now leases it out to someone for $1200 a month. So now essentially you have $50,000 left while generating $14,400 a year. Now with a $30,000 a year expense and bringing in $14,400, that means the person needs to pay $15,600 a year. With $50,000 remaining that means you have about 3 years and 2 months to be able live your life assuming the worst case scenario that you still couldnâ€™t generate new income sources.
Now maybe this person wants to do some venture capitalism and funds this new business that looks promising for $15,000 while getting 10% ownership of the company. It happens to do well which gives us an additional $1000 a month in income. Now that means we have $35,000 remaining while generating $26,400 a year. That translates to the person now having to pay $3,600 a year and with $35,000 remaining we have about 9 years and 8 months to keep going at that rate. Again, these numbers are fictional as you have to factor things like taxes while at the same time you can do some creative things to make your expenses lower. With looking at that though, you can kind of see how it can work where your income and expenses are basically kind of like on auto pilot to allow you to do other things.
Depending on your background and expertise, there are definitely other ways to yield better return on investments as well. Another way to think about it is if you had say $100,000 and your expense for the year is $30,000 in total, can you think of a way to use $100,000 to generate $2,500 a month in total? You can even go higher and say that if your yearly expense is $40,000 in total, can you find a way to use $100,000 to generate about $3333.33 a month for you? So really, you are still kind of like most people in terms of how you manage your finances such as you can buy a home by getting a mortgage. The main difference is that you are kind of letting your money/investments go out and work for you instead.
How much you need initially and how much one actually needs per month is obviously on a case by case basis depending on your current lifestyle choice and situation. Itâ€™s an interesting choice and direction I think because as mentioned before most people only think about saving that much so that they can â€œretireâ€ in the sense of not having to do anything. On the other hand, some people use it to generate a continuous stream of income to create a lifestyle where they donâ€™t have to be physically tied down in having to work all the time.